Description

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Summary

The Buckle, Inc. (“Buckle”, “the Company”, or “BKE”) (see Exhibit 1) is a fast fashion retailer of medium to better–priced casual apparel, footwear and accessories for 15 to 30-year-old men and women.  Buckle markets a wide selection of brand names and private-label casual apparel. Denim is a significant contributor to total sales (39.6% of fiscal 2021 net sales) and is a key to the Company's merchandising strategy. At the end of the 2021 fiscal year, the Company operated 440 retail stores (predominately in shopping malls) in 42 states. The Company headquarters and distribution center are in Kearney, Nebraska.  It was founded in 1948 by the current Chairman’s father.  BKE went public in 1992.

The Company emphasizes personalized attention to its guests (customers) and provides individual customer services such as free alterations, layaway services, free gift packaging, personalized stylist services, a guest loyalty program, and the Buckle private label credit card.  A majority of the Company’s store managers, district managers, and executive management team are life Buckle salespeople, including President and CEO, Dennis Nelson, and Chairman, Daniel Hirschfeld.  Messrs. Nelson (72), Hirschfeld (80), and key insiders collectively own over 40% of the outstanding shares.  Over the last 15 years, Mr. Hirschfeld has sold >25% of his shares but still controls 33%.  Although the board pays and promotes talent from within, there is an unclear succession plan that raises questions on BKE’s ongoing ability to operate in such a shareholder-friendly manner exacerbated by the fact that no other named executive owns greater than 0.5% (>50 bps) of the Company’s shares (see Exhibit 2).  At this point in the Company’s life cycle, it is critical that the board ensures knowledge transfer to younger executives.  Unfortunately, without proper share ownership incentives, cultural disruption might be imminent, and the board might be forced to recruit its next CEO/COO talent externally.  One of the Company’s strongest investment themes has been its rare mix of owner/managers who understand shareholder value.

BKE has averaged EBIT margins of 15.9%, 18.1%, and 19.4% for the most recent ~30-year, 20-year, and 10-year periods.  Over the last 10 years, margins have been around 20%.  The latest LTM EBIT margins are >25.0% (see Exhibit 13), which is an all-time high in the Company’s operating history.  We note that EBIT margins have been volatile for the last 10 years, rising to 23% in fiscal 2014, then sequentially falling to a low of 13% in fiscal 2019, then rising vigorously again to 25% in the 2Q of fiscal 2022.  During this period, the Company kept employee store compensation levels steady as it increased its online fulfillment efforts, targeted store/online advertising campaigns, increased unit prices, and negotiated better vendor pricing.  This is carefully seen within gross margins (excl. store occupancy costs) trends over the same 10-year period, as gross product margins remained consistent at 50%, but then rose sharply to 59% in the last four years (see Exhibit 25, line 18).  

With a total enterprise value of $1.62 billion, we estimate that the market is pricing BKE at a 5.0x EBITDA multiple and ~14% EBIT margins (see Exhibit 1 and Exhibit 42).  Historically, the Company has traded at 8.0x EV/EBIT vs Luxury and Big Box Retailers that historically trade at 14.2x and 10.7x EV/EBIT multiples (see Exhibit 38 and Exhibit 40).  This discount to peer multiples is a result of the Company’s anemic 5-10% sales and earnings growth over the last 30 years.  Rather than expand through acquisitions or debt issuance (vs peers), the Company has instead targeted 20% unlevered equity returns and redistributed cash back to investors.  “Profitability over growth” seems to be the theme since the 1980s.  In extremely competitive apparel it is best to pick spots and focus on profitability.  The best retail comparison might be See’s Candy Shops, Inc. (“See’s”), owned by Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A).  See’s produces boxed chocolates and other confectionery products with an emphasis on quality and distinctiveness in two large kitchens in Los Angeles and South San Francisco and a facility in Burlingame, California.  See’s operates ~250 retail stores located in California and Western states, as well as over 125 seasonal locations.  At the 2019 Berkshire annual shareholder meeting, Buffett said about See’s, “we put $25 million into it and it's given us over $2 billion of pretax income, well over $2 billion."  The goal for See’s has not been to be the biggest or to cater to everyone but to grow its niche and limit any capital investments that would cannibalize or distract from its core high-ROIC business.  BKE seems to have a similar goal.  Since 1999, BKE has returned $2.6 billion to investors in the form of dividends and share buybacks.  

From a total return, BKE outperformed the S&P 500 significantly (see Exhibit 48 and Exhibit 49).  Therefore, as a result, we recommend purchasing the stock at or below $25 per share, which gets closer to BKE’s historical low EBIT multiples of 3.5x (see Exhibit 42).  We believe BKE’s fundamental characteristics at our recommendation follow our preference of buying: (i) companies with demonstrated consistent earning power; (ii) businesses earning good returns on equity while employing little or no debt; (iii) exceptional management in place ; (iv) simple businesses; and (v) a fair price.  BKE appears to fit on all accounts.

Company History 

Buckle began as a men's clothing store in 1948 in Kearney, Nebraska (pronounced Car-nee), and now has stores across in 42 states (Exhibit 3). The first store was founded by David Hirschfeld and operated under the name "Mills Clothing".  His son Dan took over the operations in 1965.  In 1967 a second store was purchased and operated under the name "Brass Buckle".  At that point, the Company began selling more casual men's clothing and by the early 1970's Brass Buckle had developed into a denim-based store.  In 1977 the Company introduced women's apparel and has since evolved into its current incarnation. Brass Buckle changed its name in 1991 to The Buckle, and in 1992, the Company went public on the NASDAQ and traded as BKLE at $2.00/share (split-adjusted).  In 1997, The Buckle moved to the New York Stock Exchange where it now trades under the symbol BKE.

Throughout the years many changes have occurred in fashion, retail, and within the Company.  However, BKE management believes one constant has driven Buckle's success: its mission "to create the most enjoyable shopping experience possible for our guests."  The Buckle management team has a long history with the company.  As mentioned, Dan Hirschfeld has been with the company since 1965 and leads the company as Chairman of the Board.  Dennis Nelson is the President and Chief Executive Officer and has been with the company for over 30 years.  Mr. Nelson began as a part-time salesman while he was a college student and continued full-time after graduation.  He has helped lead the company to over 440 stores and is actively involved in all phases of the company's operations.  Kari Smith, Vice-President of Sales, has been with the company for 25 years.  Individuals and Insiders currently own 43% of the company.  

Competitive Strengths and Company Overview

The Buckle, Inc. is a retailer of medium to better–priced casual apparel, footwear, and accessories for 15 to 30-year-old men and women.  The majority of the Company's central office functions, including purchasing, pricing, accounting, advertising, and distribution, are controlled from its headquarters and distribution center in Kearney, Nebraska.  As of January 29, 2022, the Company had approximately 8,300 employees (called teammates) - approximately 2,800 of whom were full-time.  Buckle operates like a family-run business, and the majority of the management team, from store managers to senior management, began their career at Buckle on the sales floor.  This gives the Company a unique perspective on the business as well as a sense of loyalty and culture that is missing at many of its direct competitors. 

The Company emphasizes personalized attention to its guests (customers) and provides individual customer services such as free alterations, free gift wrapping, layaways, a frequent shopper program (the Buckle Primo Card), and the Buckle private label credit card.  The Company has an Executive Vice President of Stores, a Senior Vice President of Sales, 3 Vice Presidents of Sales, 4 Regional Managers, 22 District Managers, and 76 Area Managers. Certain district managers and all area managers also serve as manager of their home base store. In general, each store has 1 manager, 1 or 2 assistant managers, 1 to 3 additional full-time salespeople, and up to 20 part-time salespeople. Most stores have peak levels of staff during the back-to-school and holiday seasons. Almost every location also employs an alterations person.

Buckle markets a wide selection of brand names and private label casual apparel. Denim is a significant contributor to total sales (39.6 % of fiscal 2021 net sales, see Exhibit 4) and is a key to the Company's merchandising strategy. The Company believes it attracts customers with its wide selection of branded and private label denim and a wide variety of fits, finishes, and styles. Tops are also significant contributors to total sales (30.2 % of fiscal 2021 net sales). The Company strives to provide a continually changing selection of the latest casual fast fashions.  Brand name merchandise accounted for approximately 57% of the Company's sales during fiscal 2021. The remaining balance is comprised of private label merchandise.   The Company currently offers denim from brands such as Miss Me, Rock Revival, KanCan, Bridge by GLY, Flying Monkey, Levi's, Preme, Smoke Rise, Vervet, and Wrangler.  Other key brands include Hurley, Billabong, Affliction, American Fighter, Sullen, Howitzer, Oakley, Fox, RVCA, Ariat, 7 Diamonds, Nixon, Free People, Z Supply, Salt Life, White Crow, Brew City, Modish Rebel, HYFVE, Versace, American Highway, Eight X, Kimes Ranch, SOREL, Hey Dude, Steve Madden, Dolce Vita, SAXX, Stance, Pura Vida, Ray-Ban, Wanakome, Guess, Fossil, Brixton, Dr. Marten, Very G, Birkenstock, Bed Stu, and G-Shock.

The Company has an experienced buying team, which contributes significantly to the Company’s success by enabling it to react quickly to changes in fashion and by providing extensive knowledge of sources for both branded and private label goods.  The Company purchases products from manufacturers within the United States as well as from agents who source goods from foreign manufacturers.  Buckle has not experienced any material difficulties with merchandise manufactured in foreign countries.  The Company does not have long-term or exclusive contracts with any brand name manufacturer, private label manufacturer, or supplier.  In fiscal 2021, Axis Denim (which produces private label denim for the Company) accounted for 15.6% of net sales (see Exhibit 10).  No other vendor accounted for more than 10% of the Company’s net sales.

Expansion Strategy

Buckle has grown its store base consistently at approximately a 6% CAGR since 1992, and 2% over the last 10 years (Exhibit 5).   The Company's criteria when considering a particular location for expansion include: 

1. Market area, including proximity to existing markets to capitalize on name recognition;

2. Trade area population (number, average age, and college population);

3. Economic vitality of market area;

4. Mall location, anchor tenants, tenant mix, and average sales per square foot;

5. Available location within a mall, square footage, storefront width, and facility of using the current store design;

6. Availability of experienced management personnel for the market;

7. Cost of rent, including minimum rent, common area, and extra charges;

8. Estimated construction costs, including landlord charge backs and tenant allowances.

As of August 2022, the Company operated 440 retail stores in 42 states (~85% of stores are in shopping malls).  The average store is approximately 5,000 square feet (of which the Company estimates an average of ~80% is selling space), and stores range in size from 2,900 square feet to 8,475 square feet.  The Company generally seeks sites of 4,250 to 5,000 square feet for its stores.  

With 17-18% of its store fleet in smaller markets, with communities of 50,000 or less, BKE enjoys industry-leading rent (which some analysts estimate to be ~$28 per square foot and at ~9.1% of sales), but store productivity in terms of sales per sqft (“SSF”) of $468 (Exhibit 8) and revenue per store of $2.43 million (Exhibit 9) have remained below industry medians, particularly revenue per store (Exhibit 23), highlighting the fierce competitiveness of fast fashion youth apparel.  

The Company completed an 82,200 square foot expansion to its corporate headquarters facility during fiscal 2005, which housed its online fulfillment and customer service center as well as its supplies and returns-to-vendor departments.  During fiscal 2010, the Company completed the construction of a $25 million, 240,000-square-foot distribution center in Kearney, Nebraska (Exhibit 7).  The Company transitioned to the new distribution center in September 2010 and the new facility is currently the Company’s only operating store distribution center.  The Company also owns two additional facilities as part of its home office campus in Kearney, Nebraska (one of which was completed during the first quarter of fiscal 2015).